Wal-Mart to Double Neighborhood Markets

Wal-Mart Express stores "comped better than we had imagined as they hit their first year, and they reached profitability faster than we thought they would."
— Duncan McNaughton, executive vice president, chief merchandising and marketing officer, Wal-Mart

ROGERS, Ark. —Wal-Mart Stores[4] plans to open 125 new supercenters and between 95 and 115 smaller-format stores — mostly Neighborhood Markets — next year while reducing its capital budget, company officials said at an investor meeting here.

Longer term, the company said it expects to have 500 Neighborhood Markets operating within three years — more than double the 240 it currently has — with sales of $10 billion.

Wal-Mart officials said the capital budget in fiscal 2014, which begins in February, will range from $12 billion to $13 billion for the year — less than it will spend this year, they noted, although Wal-Mart did not disclose the final budget for the current year, which will end Jan. 31.

At its investors conference last fall, Wal-Mart projected a budget for the current year of $13 billion to $14 billion, with plans for approximately 120 new supercenters and between 25 and 30 smaller-format stores, mostly Neighborhood Markets.

According to Duncan McNaughton, executive vice president, chief merchandising and marketing officer, Wal-Mart intends to continue to focus on supercenters in its top 15 core markets, “where we believe there is a substantial runway left.

“We will keep our supercenter unit count roughly flat, but using capital effectively, we will take markets that are above average in profitability and market share and move those with a medium share up to a higher share.”

Regarding Neighborhood Markets, he said, “We’ve effectively doubled and doubled again the business at those stores over the last few years, and the comp sales are two times the rate of the fleet, at more than 5%.”

McNaughton said Wal-Mart has been pleased with the sales at its 12 Wal-Mart Express stores. “They’ve comped better than we had imagined as they hit their first year, and they reached profitability faster than we thought they would.

“However, the return is not where the other formats are, so we will continue to build both Express stores and Neighborhood Markets, and when the Express stores are as productive as the Neighborhood Markets, then we’ll roll those out at the same pace.”

According to Deborah Weinswig, managing director at Citi Research, New York, several factors have combined to drive the return-on-invested-capital at the small-format stores, including sharper pricing, localization, an improved produce and beef offering and “a health and wellness windfall driven by Walgreen pulling out of the ESRX network.

“In addition, Wal-Mart continues to innovate, which has driven better in-stock levels and unique products, leading to stronger same-store sales.

“The company shows no signs of relenting,” she added, “with EDLP the strategic cornerstone and merchandising and pricing initiatives driving same-store sales improvement.”

Pricing Investments

McNaughton said Wal-Mart plans to invest $6 billion in retail pricing by 2017 — after telling investors a year ago it would invest $2 billion in price through 2014. Though the investments will be broad-based, they will primarily be in food and consumables, he noted.

Wal-Mart will deliver on that promise “through productivity initiatives, logistics initiatives and cost-of-goods savings,” he explained.

Efforts to invest in price leadership through its “Ad Match” program — in which Wal-Mart compares its prices on a basket of goods against those of local competitors — are working well so far, he noted, with same-store sales up 1% and traffic up 1% compared with a control group of stores, “which means those efforts are resonating with customers.”

The company has aired the campaign in 31 U.S. markets that cover about 40% of the company’s food sales, “and our average price gap has been 17% against food competitors and 20% against health and wellness competitors.”

He said the gap was 23% against Safeway, 22% against Albertsons, 15% against Publix and 12% against Kroger, “and since launching this campaign in those 31 markets, we’ve grown our market share 30 basis points above the total chain.”

In addition to price, Wal-Mart is also focusing on merchandising by stocking basic destination items; offering good, better and best selections; offering relevant brands; and localizing the assortment, McNaughton said. Those efforts to localize resulted in a sales improvement of 400 basis points in food sales, he noted.

“We’re going market by market, category by category, brand by brand and product by product – diving deep into what products sell for — not shelf prices or average prices but at what decile the product is moving and where we need to be priced. That’s changing the game for our customers and changing the way we talk to our suppliers, and it’s working because the customer is buying.”

Duke Details Investments

In separate remarks to the investment conference, Mike Duke, president and chief executive officer, said he believes Wal-Mart still has a lot of upside to its business. "The combination of momentum, investment and discipline will continue to deliver growth, leverage and returns to our shareholders," he said.

"We have momentum in our core business and in delivering on the productivity loop. In Walmart U.S. we're executing on the fundamentals of assortments and price and also driving success in key merchandise categories and investing those savings in price leadership."

In terms of investments, Duke said the company is continuing to strengthen its e-commerce efforts — for example, by developing a new search engine that he said has improved conversion on Walmart.com by 10% to 15%; increasing the assortment of products available on its sites worldwide; and investing in Yihaodian, a Chinese web retailer.

He said Wal-Mart is committed to imposing more discipline around operating expenses and capital spending. "Three years ago we committed to leveraging expenses, and last year, we raised the bar further by setting a goal to reduce [selling, general and administrative] as a percentage of sales by at least 100 basis points over five years, and Wal-Mart is on track to meet [that] goal."

"We will generate growth through comp sales from existing business, new stores and e-commerce; Sam's is pushing hard to accelerate growth in membership and top-line sales by testing new ways to engage members and increase renewals and revenue; and our international business will continue to be a growth engine — despite slowing new-store growth in Brazil and China — expanding between 21 million total square feet and 23 million square feet this fiscal year.

"In terms of leverage, we've come a long way, but my commitment is that we have a lot of open road ahead even beyond our current plans. We will also continue to deliver returns to shareholders through dividends and share repurchases.

"So as far as we have come, I believe we still have a lot of upside," Duke said.